Inside the DISE Footnote: What Actually Gets Broken Out (and What Doesn’t)

Applicability is only part of the DISE analysis. Once an organization determines it is in scope, the conversation shifts from applicability to implementation.

In part one of this series, we discussed which entities may be subject to DISE. Here, we examine the disclosure requirements and the five reportable expense categories, beginning with employee compensation, one of the most significant and potentially complex areas of reporting.

Key Takeaways

• The five categories are purchases of inventory, employee compensation, depreciation, intangible asset amortization, and depreciation, depletion, and amortization tied to oil-and-gas or mining activity.
• Any income statement caption that contains one of five defined expense categories must be broken out in a footnote table that ties back to the face amount.
• For most broker-dealers and advisers, three of the five categories rarely apply.
• Employee compensation accounts for most of the work for these organizations, with depreciation and intangible amortization applying only when those costs fall within a shared caption, such as occupancy or technology.
• Employee compensation is a defined term based on common-law employee status, not on what a ledger line is called.

Disaggregation by Nature, Not by Function

Before getting to what matters for broker-dealers and advisers, it helps to be clear about what the standard is actually asking for, because the mechanics drive everything else. Your income statement groups costs by function, which is just another way of saying it groups them by what the money was spent on. DISE asks you to go inside some of those captions and pull the costs apart a second way, by their nature, meaning what they actually were.

It works one caption at a time. A relevant expense caption is any line on the face of the income statement, in continuing operations, that contains one or more of the five expense categories the standard cares about. Where a caption contains one of them, you break that caption apart in a footnote table, and the table must tie back to the number on the face of the income statement. The income statement itself does not change. All the new details sit in the notes.

What Are the Five Expense Categories?

The five categories are purchases of inventory, employee compensation, depreciation, intangible asset amortization, and depreciation, depletion, and amortization tied to oil-and-gas or mining activity. What the caption is called on your books has nothing to do with it. The only question is whether the amounts inside it fall into one of those five buckets.

Which Expense Categories Matter Most?

For a securities firm or an advisory firm, three of the five barely register. Nothing in a typical broker-dealer's or adviser's activities generates the oil-and-gas or mining category. And securities positions are carried at fair value under the broker-dealer accounting in ASC 940, not as inventory under Topic 330, so what sits on a trading desk is generally outside the purchases of inventory category as well. Advisers may hold securities, seed investments, fund interests, or other investments for their own account, but those positions typically are investments or financial assets, not inventory.

That leaves employee compensation doing most of the work, with depreciation and intangible amortization as situational. For most broker-dealers and advisers, compensation is a significant line item on the income statement, making it the category most likely to need a real breakout. Depreciation matters if it is buried inside an occupancy, technology, or equipment caption alongside things like leasehold improvements or trading-system hardware; amortization of leasehold improvements counts as depreciation here, and depreciation on a finance-lease right-of-use asset generally does as well, though the correct classification of right-of-use asset amortization is a judgment area worth confirming. Either can be enough to pull a caption into scope. Intangible amortization comes up in two ways. The familiar one is acquisition-related intangibles running through an expense line, which is common at advisers that have grown by acquiring books of business. The one that is easy to miss at a technology-heavy securities or advisory firm is amortization of internally developed software capitalized under ASC 350-40: trading, portfolio-management, and client-facing systems are frequently capitalized as intangible assets, and that amortization can pull a caption into scope. Whether capitalized software amortization belongs in the depreciation category or the intangible-amortization category is a judgment call rather than a default, since it turns on the guidance used to account for the software (ASC 350-40 or ASC 985-20) and should track how the firm already classifies that amortization in its existing ASC 360-10-50-1(a) depreciation and ASC 350-30-50-2(a)(2) intangible-amortization disclosures.

Where Do Most of a Firm's Costs Land?

This is the part that tends to surprise service firms, and both broker-dealers and advisers are service firms, whatever the trading floor or the AUM chart makes them feel like. There are only five categories, and most of what these firms actually spend money on is not one of them. Floor brokerage, exchange and clearance fees, communications and market data, occupancy, professional and regulatory fees, technology, and, for advisers, sub-advisory and platform costs: all of it is real, some of it is large, and none of it falls into a required category.

So, for each caption you disaggregate, whatever remains after you pull out the required pieces is swept into a single line called other items. It is just the caption total less the amounts you broke out. A nuance to keep in mind is that the table is not only the five categories plus the reimbursement line plus other items. It must also break out, on their own lines, certain amounts that other areas of GAAP already require you to disclose when those amounts sit in the same caption, so the residual other items line is what is left after both the five categories and those already-required amounts are pulled out. More often than not, that leftover line is the biggest number in the table. And the standard will not let you leave it sitting there as a figure with no explanation. You have to describe what is in it, in words, grouped by the nature of the costs, and in enough detail to match how big it is. Writing that description is probably the most real work the standard creates for many firms, and it is far easier to write while you are looking at a full year of detail than when you are trying to piece it back together after the books have closed.

It helps to see this on paper. Say a broker-dealer reports a single line, Other operating expenses, of $48,200 on the face of its income statement. (The figures here are in thousands and made up for illustration.) That line includes depreciation on leasehold improvements and some trading-system hardware, plus amortization of a customer-relationship intangible picked up in an old acquisition, so it is a relevant caption and has to be broken out. The footnote might come out something like this:

Alongside the table, the notes would spell out what is sitting in other items, something to the effect that it is made up mostly of floor brokerage, exchange and clearance fees, communications and market data, occupancy, professional fees, and regulatory fees. They would also explain that the reimbursement line is money paid to the parent for compliance and technology people who are on the parent's payroll, not the broker-dealer's.

Employee Compensation Is About Who Employs the People

For most broker-dealers and advisers, employee compensation is likely to be a significantly scrutinized DISE category because it often represents the largest operating expense. Employee compensation is a defined term and broader than the payroll register. It runs off the common-law definition of an employee, the same one used for stock compensation under Topic 718, with the factors laid out in IRS Revenue Ruling 87-41. What counts as compensation is wide: salaries and wages, of course, but also bonuses, profit-sharing, deferred cash compensation, share-based awards, and pension and other post-employment benefits. That breadth is worth flagging for broker-dealers and advisers in particular, since deferred and equity pay can be a large piece of the number. One item has to be kept out of the employee compensation figure even though it looks like compensation: one-time employee termination benefits. The standard requires them to be disclosed on their own line, separate from employee compensation, in each table where they appear. For broker-dealers and advisers, that most often means severance from a restructuring or the wind-down of a book of business. Therefore, if a compensation caption includes termination pay, expect a separate line for it rather than a single blended compensation number.

The catch is that all of it applies only to your own common-law employees. What the ledger line is called does not settle anything. A line named salaries or compensation does not automatically belong in the employee compensation column if the people behind it are not considered your employees under common law. Leased workers, or people brought in through a professional employer organization, can sometimes be treated as yours, but only if a specific set of conditions is met first, so it is not safe to assume. The same test decides between consultants and independent contractors. Fees paid to a consultant or a 1099 worker are not employee compensation, because those people are not your common-law employees, so the cost falls into other items rather than the compensation line. The 1099 label does not settle it, though, since a worker treated as a contractor who in substance meets the common-law employee test would still be employee compensation, so the classification follows the relationship, not the tax form. And then there are the people whose cost reaches you through a sharing arrangement with a parent or an affiliate, which, for both broker-dealers and advisers, is the big one, and which is worth its own discussion below.

For advisers that are in scope, this can matter even more because compensation is often an even larger share of the income statement than at a broker-dealer. How the firm is organized adds a step. Many advisers are partnerships or LLCs, and the category still turns on the common-law definition of an employee, so an owner-managed firm has to assess each service provider's status rather than assume that everything labeled compensation belongs in the employee-compensation column. Amounts paid to people who are not common-law employees cannot be included in the employee compensation category, while equity-style pay, including profits interests, phantom units, and deferred arrangements, has to be mapped to the right place under the applicable guidance rather than assumed in or out. This is the adviser's version of the “ who employs them" question, and it is worth discussing with your auditors.

A Note for Banking-Specific Accommodations

DISE includes a narrow practical expedient for banking entities. An entity that presents a "salaries and employee benefits" caption to comply with SEC Regulation S-X Rule 9-04 may use that caption's amount instead of computing employee compensation under the DISE definition. The key is who Rule 9-04 covers. It is the income-statement format for banks and savings institutions and for the consolidated financial statements of their holding companies, so the expedient is available only when the reporting entity's own financial statements are actually prepared under Rule 9-04. That is why it rarely reaches a broker-dealer or adviser. A broker-dealer files its audited financial statements under Rule 17a-5, not Rule 9-04, and an adviser generally files no GAAP financial statements at all, so neither presents under Rule 9-04 on its own. Being owned by or affiliated with a bank does not change that, because the expedient attaches to the statements presented under Rule 9-04, which are the bank's or holding company's, not the subsidiary's. In a bank-owned group it shows up at the consolidated holding-company level, where the subsidiary's compensation is folded into the group's Rule 9-04 salaries caption. It does not carry down to the broker-dealer's or adviser's own Rule 17a-5 or standalone financial statements. For those, expect to apply the DISE employee-compensation definition, including the common-law employee analysis.

Want to Learn More about Employee Compensation?

For most broker-dealers and advisers, identifying the applicable categories is the easier part. The greater challenge is determining how compensation costs move through shared-services arrangements, holding structures, and affiliate relationships, which is slowly becoming the norm for many organizations.

In part three, our financial services team delivers a comprehensive shared-services analysis, along with selling-expense disclosures that are easy to overlook, and the practical steps to take before the DISE footnote is due.

Explore Part Three.

Frequently Asked Questions

Our compensation is already its own line. Does that mean we are done?

Not necessarily. A caption that is purely employee compensation related to the entity's common-law employees can be left alone. But it stops being pure and has to be broken out in two situations. If it also carries a reimbursement to a parent or affiliate for shared people, that reimbursement has to be shown on its own line, separate from employee compensation. And if it includes fees paid to independent contractors or 1099 workers, those amounts are not employee compensation, because the people are not your common-law employees, so they have to be pulled out of the compensation figure and described with the other residual costs. What the line is called does not settle it. What matters is whether everything in it is compensation of your own common-law employees.

Do we need a full comparative year ready for the first filing?

Under the normal prospective approach, no; the comparative columns fill in over the next couple of years. For broker-dealers, this issue is often less significant because annual audited financial statements are typically presented for a single year, without comparative prior-year information. As a result, a full comparative year is generally not required for the initial filing. However, waiting until a year is closed can make the data much harder to support, so the relevant categories should be identified and captured as the year unfolds. And if you decide to show prior periods retrospectively, you will need supportable information for those earlier periods, too.

Can we estimate?

Yes, within reason. The standard allows reasonable estimates and other reasonable methods to approximate the disclosed amounts. What it does not allow is skipping the disclosure because the data is hard to pull.